Opensea’s insider trading case is a wake-up call for Web3
Web3 has a bad habit of using its niche, isolated existence as cover to engage in offensive behavior. While the nascent state of the crypto and NFT market opens up seemingly limitless opportunities for all types of creatives and builders, its relatively unregulated nature (and the promise of making millions in an instant) can tempt people to act in ways that will result in fines or even prison terms in other industries.
That Web3 is not beyond the reach of regulatory or criminal oversight is something the community is being reminded with increasing frequency these days. On May 3, Nathaniel Chastain, the former head of product for NFT market giant OpenSea, was found guilty of fraudulently buying NFTs he knew would rise in value.
The verdict is being called the first conviction for insider trading the NFT space has seen, and it likely won’t be the last. While officials and public figures engage in a somewhat amorphous back-and-forth on the issue of classification, regulation and enforcement of blockchain-enabled technology, industry enthusiasts should not mistake that vacillation for ignorance or incompetence. Web3 is not untouchable, and as time goes on, this fact will only become more apparent.
A case of insider trading
The drama began in September 2021, when NFT community members dug into blockchain records and discovered that Chastain had been buy up NFTs from collections that OpenSea later displayed on its website using a few different wallets. Immediately after the floor prices of these collections increased, likely in part because they were highlighted on the home page, Chastain sold the NFTs and redirected the proceeds back to his primary wallet.
In a now-deleted blog post, OpenSea addressed the incident, and confirmed that they were aware of the situation and were investigating the matter. Shortly after the scandal broke, Chastain resigned from the company, and in June 2022, the former OpenSea employee was officially charged with insider trading by the FBI. Prosecutors and defense attorneys presented their closing arguments to the jury on Monday, and on May 3, 2023, Chastain was found guilty.
Although the guilty verdict is notable for its novelty, it is unlikely to result in an immediate and steep increase in similar cases, in part because the verdict shied away from classifying NFTs as securities. Aside from the SEC and CFTC, regulators who have been fighting for authoritative control of NFTs for some time now, the question of whether NFTs are securities is one that almost no one wants to stick their neck out trying to answer.
The good and bad of regulation and enforcement
Regardless of such categorical ambiguities, regulation and enforcement have been tightening in Web3 for some time. Some of these initiatives and rulings are good and necessary, such as the FBI and IRS crackdowns on fraud and blockchain money laundering schemes.
It is important to keep in mind that Web3’s anonymity does not guarantee protection from federal prosecution. Domestic and international asset protection experts and special agents working for the US government have noted that it would be foolish to assume that bad actors are beyond the reach of IRS Criminal Investigation at any level.
But other attempts to roll into the industry can appear opaque and even confusing, like the Gary Gensler-led SEC’s long-standing regulate-first-ask-questions-later approach to the securities issue. Attitudes like this may not constitute the wisest strategy, something other commissioners in the organization have also said several times.
But mixing up good and bad faith regulation and enforcement helps no one. While clarity on these matters needs to come from organizations at the top, Web3 commentators similarly have a responsibility not to paint a hyperbolic picture of the landscape while chasing likes and visibility on social media.
So, what happens next?
Chastain and his legal advisors are “currently evaluating [their] options,” according to a statement from his attorney, David Miller, after the verdict was read. Chastain faces up to 40 years in prison for the offense and will be sentenced at a later date.
The rest of the space should take note. The counterculture’s basis for the NFT space is something to appreciate, actually. The spirit of innovation outside the walls of web2 or the traditional art world has done some amazing things for artists and for technological and social progress in general in recent years.
However, getting it wrong or abusing Web3’s potential is unwise; space does not exist outside of social and legal accountability. It may not be long before blockchain misconduct, whether related to insider trading or influencers hiding NFT payments in exchange for social promotion, results in swift and decisive legal consequences. Even the most die-hard Web3 fan can admit that the space could benefit from greater fairness and justice.
